A 'new normal' for home construction ricochets through Michigan

While Michigan's economy has long recovered from the Great Recession, house-building activity across the state remains well below historical levels and is making it harder for prospective buyers to successfully bid on any homes this spring.
J.C. Reindl, Detroit Free Press

Zach Christopoulos, 24, of Northville, Michigan, descends from the master bedroom of his new-construction townhouse in Wixom, Michigan on May 7, 2017. (Photo: Lex Dodson, Special to the Free Press)

While Michigan's economy has long recovered from the Great Recession, house-building activity across the state remains well below historical levels and is making it harder for prospective buyers to successfully bid on any homes this spring.

The Home Builders Association of Michigan forecasts that 16,515 new single-family house permits will be pulled this year, about 60% fewer than in 2005, the last strong year before a hard downturn in Michigan's real estate market.

Although new home construction has been inching up the past couple years statewide and in metro Detroit, industry experts say they do not anticipate building activity returning to late-1990s and early-2000s levels across Michigan for many years.

“It’s not a good thing long-term for our state if the new normal stays this way," said Bob Filka, CEO of the Home Builders Association of Michigan. “Normally when we’ve had economic recovery we’ve had housing fuel upward as well — that’s just not happening today.”

The basis for this more sluggish prognosis:

A slower-growing Michigan population.

Rising construction costs and potential labor shortage.

Harder-to-obtain development financing for new subdivisions.

More interest in condos and lower-priced town houses, particularly among millennials and retirement-age buyers.

To some degree, tightened land-use restrictions.

Across metro Detroit, the slowdown in new single-family home construction has contributed to an inventory crunch in the market for existing homes.The latest report from the Realcomp multiple-listing service shows listings for houses and condos down 44% in March from a year earlier in the metro region, which the report defined as Wayne, Oakland, Macomb and Livingston counties.

Tough time for buyers

This relative scarcity of for-sale homes can be good news for sellers, who are finding an easier time getting offers. But it makes for a frustrating time for would-be buyers.

Realtor Andy Hargreaves of Coldwell Banker Preferred in Plymouth said he is definitely noticing fewer available homes compared with a year ago. Houses in the $200,000-plus bracket are especially popular and can see a deluge of offers within days. A ranch house in Livonia in that category recently received 21 offers over a single weekend, he said.

"Between $200,000 and $250,000, I cannot keep them on the market more than three or four days without multiple offers," Hargreaves said.

These bidding wars can be tough for people looking to finance a purchase through government-sponsored mortgage programs.

"Increasingly, if you have an FHA loan, a VA loan or a MSHDA mortgage, you can almost forget it," Hargreaves said, referring to programs by the Michigan State Housing Development Authority, often with down-payment assistance and lower interest rates. "There is so much competition out there that if you're not having the optimum financing terms, you're going to be looked over in almost all circumstances."

Housing prices continue their climb upward from recessionary lows, driven in part by the shrunken inventory of on-the-market homes.

Metro Detroit home prices were up 6.2% in February from last year — and a full 70% higher than the market's lowest point in April 2011, according to the most recent Standard & Poor's/Case-Shiller Home Price index, which counted Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties.

Still, the index shows that prices in the region overall are about 14% off their market peak in late 2005 and early 2006.

"Values are pretty much up to what they were on most homes, but there are still pockets of homes across the area that haven't recovered 100%," said David Elya, a broker at Brookview Realty in Rochester.

One reason for the thinner number of existing home listings is sellers who are looking to downsize and stay in the area are having trouble finding desirable properties where they could move to, Hargreaves said.

"Our big logjam is that people are willing to move because the values are good, but when they go online and see what they can move to, they ask, 'Why am I going to move?' " he said. "There is such a void of homes that are even between $200,000 and $300,000."

One bright spot in residential construction is new condominiums and town houses. That category saw a 44% jump in building permits last year compared with 2015 in southeast Michigan, according to data collected by the Southeast Michigan Council of Governments. The council attributes the rising popularity of condos and town houses to young adults and retirement-age buyers seeking affordable and simplified, maintenance-free living.

This year, Zach Christopoulos, 24, bought a three-story, two-bedroom town house in Wixom in the Liberty at Tribute community, a short walk from shops, restaurants and Wixom's downtown. Built by Bloomfield Hills-based Robertson Brothers Homes, the development features town homes starting at $195,990. Association dues are an extra $200 a month.

Robertson Brothers began building Liberty at Tribute before the downturn and took a break on construction as the market recovered.

Christopoulos, who currently rents an apartment in Northville, will be the first in his circle of friends to have a newly built home once his 1,541-square-foot townhouse is finished in July.

He said he spent six months looking at new houses and newer existing homes, but didn't see much in the area within his maximum budget of $225,000. But the town house option fit his needs well.

"All of the new homes I saw were outside my price range, and I didn't want to continue to rent because I felt like I was throwing money away," Christopoulos said. "This was really my only option for new."

Across Michigan, much of new single-family home construction in the early 2000s was fueled by the real estate bubble that eventually burst. The statewide population was growing modestly or stagnant between 2002 and 2005, although the number of new single-family home permits stayed above 40,000 annually, according to data from the U.S. Census Bureau and the Home Builders Association of Michigan.

Slow rebound from the crash

Last decade's real estate crash hit Michigan a bit earlier than the rest of the country. And once it did, many new residential projects stalled and some home builders left the state or exited the business. Single-family home permits statewide plummeted to 6,392 in 2009 — and just more than 1,000 new permits that year in southeast Michigan.

"I think that was clearly unsustainable," Brandon Jones, division president for Michigan for PulteGroup, said of residential construction activity. "It didn't match the employment curves at the time, so the drop (in southeast Michigan) from 15,000 permits down below 2,000 permits was that correction."

Even though Michigan's economy has recovered from the recession, builders say that financing for new residential developments is harder to obtain than before the crash. This has affected the smaller companies that build homes more than national players in the Michigan market such as Pulte and Toll Brothers.

"Home building is a very capital intensive business and you really need a big lending source in order to pull a lot of building permits," said Howard Fingeroot, managing partner at Bloomfield Hills-based Pinnacle Homes. "So what that translates to is the bigger builders are building a larger percentage of the homes that are being built today."

PulteGroup has seen strong interest in its recent developments, including the 249-lot Orchards of Lyon in Lyon Township with an average $397,000 price for the new houses and in its 103-lot Deneweth Farms in Macomb Township, where prices average $387,000.

From left, Gerald Underwood, his daughter Georgia Underwood, 2, and wife Heather Underwood pose outside their house on Friday, May 5, 2017 at the Pulte housing community in Macomb.(Photo: Rachel Woolf, Special to the Free Press)

This past winter, Gerald and Heather Underwood and their 2-year-old daughter moved into their newly built two-story colonial in Deneweth Farms, a size upgrade from their previous house, also in the township.

They had initially look at buying an existing home, but didn't find many desirable options during their house-hunting tours.

"We just really weren’t finding the exact things we wanted and needed, so we decided to go the building route — so we could pick out what we wanted," Gerald Underwood said. "To find exactly what we wanted we either needed to buy and be willing to make repairs, or spend more than we were willing to spend."

Home builders cite tighter restrictions in some communities as another possible factor in the dearth of new construction. The City of Plymouth approved a new zoning ordinance amendment in January to rein in so-called "bigfoot houses," or large houses built on small residential lots, usually after a 1950s or 1960s bungalow or ranch has been torn down.

The Plymouth ordinance imposed a 0.4 floor-area-ratio restriction for new single-family homes. That means on a 10,000-square-foot lot, a house can be no bigger than a total 4,000 square feet — including upper floors and attached garages.

"You can still have a big home, you just can't have a huge home," said Plymouth Mayor Dan Dwyer.

Dwyer said the restriction came in response to a residents' survey and public hearings that found widespread concern in town about the bigfoot trend.

"When you build a great big huge home and then your neighbor has a 1,100-square-foot home, your neighbor's house looks like a garage," Dwyer said. "And so they complained, 'You know, my home now has less value because I sit next to this beast and my house looks less impressive."

To be sure, some sellers of those older and smaller homes were fetching $350,000 to $400,000 for essentially just their lot, the mayor said.

"It's change, and some people are more agreeable and adaptable to it," he said.

Of the new single-family houses being constructed across Michigan, industry experts say they tend to be higher-priced homes and fewer are aimed at entry-level buyers. This trend relates to rising construction costs, still-low mortgage rates that make bigger homes more affordable, and the higher expense of land in highly desirable markets.

The average value of a new single-family house permit in southeast Michigan was $268,998 in April, which roughly translates to a $376,600 sale price after factoring in land costs, according to the Home Builders Association of Southeastern Michigan.

"In these markets like Royal Oak and Novi and some others, it's very hard to buy the land and bring the house in at a price point that will appeal to a first-time home buyer," said Jim Clarke, president of Robertson Brothers Homes.

Rising constructions costs and a potential shortage of skilled labor are other commonly cited factors for the higher prices of the new houses getting built.

Filka of the Home Builders Association of Michigan said lumber costs alone have risen $3,600 for the typical house since the beginning of the year.

And Joe Boji, construction manager of Farmington Hills-based Boji Development, said his firm is seeing a shortage of labor in many of the skilled trades.

"It's been an issue with all of our developments," Boji said. "Everything takes more time. Everybody is busier. So where we used to be able to get someone there in a couple of days, now it's taking a couple of weeks."

"And if it takes longer to build, financing costs get higher because you're paying for money longer," he added.

Yet not everyone agrees that a skilled labor shortage is holding back the housing market — at least not yet.

New townhouses under construction in Wixom, Michigan on May 7, 2017. (Photo: Lex Dodson, Special to the Free Press)

Although many tradespeople did leave Michigan or switch professions in the downturn, parts of the state have only recently hit more or less full employment in many trades, according to Mike Jackson, executive secretary/treasurer of Michigan Regional Council of Carpenters and Millwrights.

“I think a lot of times the contractor community and the business community want to create a large labor pool so they can keep the costs down, so they sound the alarm real early," Jackson said. “This summer, the demand for carpenters could exceed the number we have — there’s a possibility of that — but they could solve that by paying more so more people would come into the trades."